Concall notes FY24 Q2

Resilience Amidst Supply Disruption:

• Overcame 18-day supply halt from FCI swiftly.
• Bengal plant adapted, produced ethanol from maize.

Market Dynamics and Adjustments:

• Faced FCI ban during peak rice and maize prices.
• Despite customer price revisions, experienced margin compression.

Outlook for Margin Improvement:

• Anticipating increased margins in Q4 with favorable kharif crop.
• Considering in-season raw material storage to manage volatility.

Operational Updates and Expansion:

• Awaiting regulatory nod for additional 120 KL capacity.
• Jharkhand and Bengal expansion to reduce production costs by 5%.
• Stable fuel costs maintained with technology upgrades.

Strategic Initiatives and Brand Performance:

• Secured one-third of fuel demand through recent auctions.
• Boiler technology upgrade in Haryana underway.
• Prestige brands gaining momentum with innovative offerings.

Consumer Segment Summary:

1. Premium Segment Surge:

• Q2 volumes: 0.08M cases, up 143% YoY, 68% QoQ.
• Prestige brands contribute 6.1% to total consumer revenues.

2. Geographic Reach:

• Presence in UP, West Bengal, Delhi, Haryana, and Punjab.
• Robust routes in Delhi, West Bengal, and Haryana; plans for UP, Punjab, Rajasthan (Q3), and Jharkhand (Q4).

3. Revenue Growth:

• Total consumer revenues up 24% YoY in Q2 FY24.
• Mountain Oak Whisky expands nationwide.

4. Product Momentum:

• Terai Craft Gin broadens distribution.
• Snoski Vodka expands in Haryana, West Bengal, and Delhi.
• New launches in premium rum (Q1 ’25) and super premium malt whiskey (Q4 ’24).

5. Strategic Branding:

• India Craft Spirit Company consolidates highest price offerings.
• Utilizes four generations of promoter’s alcohol industry history.

6. Value and Value Plus Success:

• Volume growth: 12% YoY to 3.54M cases.
• Average realization grows 9% YoY to INR 558 per case.
• Global Green captures 5% market share in whiskey flavor.

7. Market Dynamics:

• Rajasthan market share: 35% in Q2 FY24, up from 34% in Q2 FY23.
• Dominates Rajasthan with a 61% market share in the value plus segment.

Financial Highlights from Q2

1. IMFL Loss and EBITDA Burn:

• IMFL loss in Q2: INR 6.5 crores.
• Projected annual EBITDA burn: 20-25 crores, with a potential decrease as volumes increase.

2. Ethanol Procurement and Pricing:

• OMCs’ ethanol procurement tender underway.
• Current ethanol prices: 64 for rice, 66 for maize.
• Prices for the new year pending, expectations of stability in rice prices and potential action on maize ethanol.

3. Impact of FCI Rice Procurement Challenges:

• 18-day disruption led to production halt in Bengal and Jharkhand.
• Shift from FCI rice to maize and broken rice impacted profitability.
• Estimated impact: INR 5 to 7 per litre for subsequent supplies.
• Expected 8% decrease in grain costs in H2, impacting from December to March.

4. Power and Fuel Costs:

• Power and fuel costs fluctuated between INR 1.8 to INR 2 per GCV.
• Absolute power and fuel spend for Q2: INR 59 crores.

5. Net Debt (as of September 30, 2023):

• Net debt, excluding cash and cash equivalents: INR 235 crores.

Business Strategy and Expansion Highlights:

1. Product and State Metrics:

• Key products include Governor’s Reserve, Oakton, Mountain Oak, Terai Gin, Snoski, with new launches in premium malt whiskey and rum.
• Strong presence in West Bengal, Delhi, and Haryana; upcoming launches in UP, Punjab, Rajasthan, and Jharkhand.

2. IMFL Business Growth:

• Vision to invest in and strengthen the IMFL business.
• Aim to achieve 20% of consumer business share from IMFL.
• Focus on diverse portfolio and innovation alongside established products.

3. Innovation and Brand Strategy:

• Ongoing innovation, e.g., launching a new flavor for Snoski.
• Emphasis on transformative products for brand success.
• Core products like Mountain Oak, Oakton, and Governor’s Reserve for market presence.

4. Market Dynamics:

• Stronger market presence in West Bengal, Delhi, and Haryana.
• Expansion plans for UP, Punjab, Rajasthan, and Jharkhand in the next six months.
• Consideration for launch in one additional new state.

5. IMIL Business Expansion:

• New launches planned in Haryana, Delhi, Rajasthan, and West Bengal.
• Limited expansion in other IMIL states like UP and Punjab.
• Strategic decisions aligned with business priorities.

Highlights:

1. Utilization:

• Q3: Expected 80-85%, pending consent for expanded capacity.
• Q4: Full capacity utilization target at 95%.

2. Financial Impact:

• FCI disruption, higher grain prices: INR 42 crores impact.
• Anticipated profitability improvement post-Kharif season.

3. Revenue Composition:

• Ethanol: 30-35% of overall revenue.
• Stable ENA pricing; Q3, Q4 seasonal uptick expected.

4. Raw Material Strategy:

• Maize as key input; ongoing farmer education.
• Short-term: Rice primary for Bengal plant.

5. Capacity Expansion:

• Capital work: INR 155 crores; INR 115 crores expected to be capitalized in H2.
• Upgradation ongoing; Bengal, Jharkhand expansions.

6. Packaging Costs:

• Marginal impact; glass cost up, offset by reductions in CC box rate, reduction in paper prices and pet resin prices
• Costs in material consumed, not in other expenses.

7. Revenue Diversification:

• Active management of ethanol, ENA sales.
• Utilization of leftover ENA capacity through ethanol sales.

8. Capex and Depreciation:

• Expected INR 100 crores capitalization; total capex INR 115 crores.
• Constant depreciation in H1.

Ethanol Pricing Outlook:

• Anticipates slow reaction from oil companies to market changes.
• No significant price increase expected in the next few weeks.
• Government’s E20 blending mandate likely to influence price revisions.

Potential Downward Revision:

• In case of sustained low prices, possibility of downward revision.
• Long-term sustained reduction could lead to a downward adjustment.

Timing of Price Revisions:

• Price announced at the end of October for the next year.
• Revisions happen as needed, not limited to specific timings.

Business Margin Impact:

• Majority of margin reduction in manufacturing business.
• Consumer business also impacted, but not the primary contributor.

Price Increases and Consumer Business:

• Consumer business experienced margin reduction due to raw material price increase.
• No price increases in the consumer business contributed to margin challenges.

Sustainable Margins for Blended Business:

• Depends on the growth rate of the consumer business.
• Growth rates in Value, Value Plus, and IMFL show promise.
• Further guidance contingent on raw material price correction in December and Q4.

Future Guidance and Considerations:

• Waiting for new crop and raw material market stabilization.
• Plans to store inventories during the seasonal downturn.
• Longer-term guidance and sustainable margins assessment expected after the raw material price correction.
• Anticipates some price increases in the consumer business around February, March, and April.

FTA Agreement Impact:

• Immediate benefit: Reduction in scotch prices used in blending.
• Increased competitiveness of scotch in the country.

International Market Exploration:

• Immediate focus on TERAI for exports.
• Global interest in Indian spirits industry gaining momentum.
• Aim to establish Indian spirit brands with sustained global presence.

Bored Beverages and Market Expansion:

• Initial focus on Delhi and Haryana.
• Future expansion to align with Globus Spirits’ operations and premiumization strategy.

Possibility of Globus Brands in Mumbai and Pune:

• Bored Beverages currently not operating in Mumbai and Pune.
• IMFL business initiated with Terai Gin; other brands to follow.
• Maharashtra entry prioritized based on strategic value and profitability.
• No specific timeline provided; not a current priority market.

Consumer Business Revenue in Q2: Seasonal Softening

• Q2 typically softer than Q1 due to excise year dynamics.
• Q1 sees inventory replenishment, new players entering the market.
• Q3 tends to be higher with festive seasons in October-December.
• Q4 may show softening as business partners prepare for excise policy renewal.

Franchise Bottling Impact and Outlook:

• Franchise bottling is a small part of revenue.
• Impact observed in Q1; management expected normalcy in Q2.
• Current status indicates persistence of impact.
• Difficulty in predicting future growth as it depends on fortunes of brand partners.

I am an investor in eMudhra and thus biased but I am going to make a case for this company. Also I think an initiating coverage post was never made here. So here we go…

What the does the company do?

The company is in the business of providing trust in the digital world. This has manifested in various different forms but can broadly be classified between Public and Private. Public trust refers to scenarios where entities need to be authenticated over the internet, while private trust is needed where authentication is required within a private network of devices / servers.

Public Trust Solutions

1. DSC: The Digital Signature Certificate is the oldest solution provided eMudhra where they behave as the Public Certificate Authority providing proof that the person signing the document is indeed the person who they claim to be.
2. SSL: This is very similar for DSC, except while DSCs are made for humans, SSLs are made for websites, servers or machines.

Private Trust Solutions

1. emSigner: This is eMudhra’s paperless transformation solutions where they digitize workflows of an organization along with providing secure digital tools for various approvals. The simplest example would be getting your expense approved by your boss before submitting it to finance for processing.
2. emAS: This is their access management solution. It provides features like multi factor authentication and also allows restrictions to be placed on users basis their role and clearance levels. Think employees not having edit access to attendance records, while HR having it. Or Supply Chain team not having access to Marketing DBs.
3. emCA: If a corporation has a large network of devices and usecases, getting them all certified by a Public CA can be expensive. Instead to ensure sercurity on their private network they may choose to set up a private CA for themselves that will manage the Certification for all devices, services, people within that network. The customer can also use this solution to become a public CA as well!

How does it earn?

The company has various business models running:

1. Public Trust: Made up of SSL and DSC. Sold for a 2 year period (generally) at which point they need be renewed. These are sold via channel partners and also D2C. This is about 33% of the business.
2. Paperless Transformation: Made up of emSigner. This is sold to companies on a license basis (basis number of users) and for a particular set of time (~5 years). There is an additional AMC fees associated with it which is recurring. Also license counts increase as usecases increase within the same organization. This forms 17% of the business.
3. Zero Trust: Made up of emAS, emCA and some other products (e.g. emDiscovery). This is the same as emSigner in terms of business model and forms 50% of the business.

Hence, while 30% of the revenue is still coming from the DSC business, eMudhra has moved considerably away from being only dependent on that and is now in more in the space of Zero Trust security which is a much larger global theme being played out. This is a security approach where devices are not trusted even if they are part of the network and everything is authenticated. This become a preffered approach to mitigate the damage that a malicous actor can do even if they manage to compromise the security and enter the network (e.g. steal a laptop).

Total Addressable Market

1. Public Trust: I am ignoring this because I don’t consider this a major growth area.
2. Paperless Transformation: Generally considered a 8-10 B dollar industry growing rapidely (30%)
3. Zero Trust: is a huge market, but the company has pegged the size for their products at about 15 B dollars.

Geographical Spread

eMudhra began its operations in India but quickly spread its market. We know that 45 to 50% of their business comes from abroad but country wise split has never been shared. It is reasonable to guess that currently major portion of this is coming from the Middle East, with Africa rising fast and their hope is to make US the largest market in the medium to long term.

Basis management commentary, it seems like MEA is a strong region for them and they have been present there for a while. They believe there is a lot more opportunity here to grow. However, nothing beats the scale of America.

They have been trying to make forays into the US for the last few quarters and this has been a learning curve for them. This is not to say that they have not managed anything: Management said that even this year about 60 Cr revenue should come from the US.

If and when they crack the American market, this can accelerate their top line quite significantly.

Right to Win

Their right to win is incredibly simple and powerful:

1. They are cheaper compared to all their western competitors
2. Are willing to work with th customers and fine tune their product for them
3. Have stayed in these geographies for years and established credibility

Financial Track Record

The company has grown at 35%+ for the last few years and infact the last 3 quarters has grown at 69%, 53% and 65%. Its profit growth has not kept pace with the top line because I suspect the company has taken a conscious cost to increase BD expenses to scale faster. Their new benchmark is 30% EBITDA margins. In a couple of quarters the baseline will have adjusted and then profit growth will be in line with revenue growth.

The company is cash flow positive, no debt, and has an ROE of 22%.

Valuation

This stock is at 55 PE. If it continues to grow at 50-60% within 2 quarters it will be 30.

Thanks for your answer. Having a goal in mind makes planning easy, I agree. However having a goal amount also means you need to know when you need that money. If you are employed in the traditional sense, this is easy, you kind of know when you will retire and when you will need the money.

In my case, I have a goal number that I know I need but I don’t want to stop there. I am not planning on a retirement at a certain age. I am self employed, I tried retirement for a year when I was 32, I am done with the idea. I live better doing what I do.

I am sure there will be a time when my current skills are no longer valuable and / or I don’t feel like doing what I do. At that point I want this corpus to give me the opportunity to do what I want to do. I don’t know what that is today, so the goal is to maximize the corpus. It could be farming oranges, or it could be doing carpentry. We will see.

I am 35 currently, so I am taking 20 years as a safe time frame. My father and his father and his father all had plenty of energy at 55, 65, and even 75. So I am guessing I will have enough energy to pursue my projects at least until 55. If I am still alive that is.

There was a time when a friend of mine used to say that he would retire if he had 4Cr corpus. I used to think that was a crazy amount. Forget 4Cr corpus, I didn’t even have 4L to my name at the time.

Many years later that friend comfortably has 4Cr+ and retirement isn’t anywhere in the horizon. A family of four, lifestyle inflation, wants and needs have all played a part.

But the thing is, I don’t look at him and his 4Cr number and think that’s crazy. You cannot comfortably retire with 4Cr today if you are living in a metro and you are in your 30’s.

Mathematically it might be possible, but I don’t think it will be comfortable.

If money = purchasing power, the moment you do not have a steady income stream the purchasing power of your money goes down (in your head or maybe it’s just my head).

Let me explain. When you have a salary, you might be happy to spend 100% of that in a month. Because you know it’s coming back on the 1st of the next month. Once you retire, nothing is coming back. So instantly the money you have is more precious. Add age, health issues and other factors in the picture and what you have will not feel enough.

So it’s more mental than what you actually need. There are people who are happy with 2L in their bank account and there are people who will not feel comfortable even with 1Cr in their bank account. It’s all in your head and it’s very personal. Nobody is right or wrong.